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No way all of these start-ups are worth more than $1 billion

This chart from The Wall Street Journal might take a little explaining. The width of each bar shows the value of these new companies as estimated by venture-capital firms. Dropbox and the Chinese phone brand Xiaomi, at the top, have been valued at no less than $10 billion. The darker area at the left of each bar shows how much money has actually been invested in the companies.

So: while the online retailer Zalando, which is apparently huge in Europe or something, has been valued at $4.9 billion, only $49 million has been invested in the firm. If the valuation is correct, that means a dollar invested in Zalando is now worth no less $100 (a return of 9,900 percent). The investors, in that case, have multiplied their funds one-hundred-fold, which would be probably the best investment any of them has ever made.

At the bottom of the chart, Beats Electronics has been secured $560 million in funding since the brand’s inception in 2006, now has the comparatively modest valuation of $1 billion. Investors have, on average, approximately doubled their money by betting on Beats if the valuation is right.

The estimate for Beats seems at least plausible. It is also possible that Zalando is just a very, very good company. We don’t know as much about their financials as their investors do.

But something is definitely wrong here. The probability that all of the companies listed here could be so valuable relative to the equity has got to be pretty tiny. All of the investors represented in this chart can’t be right. A tip of the hat to Alphaville’s Paul Murphy, who included the chart in their “This is nuts. When’s the crash?” series.

Click “Know More” for detailed profiles of the companies in the chart above.

Correction, January 28, 3:05 p.m.: Thanks to Helium Magazine’s Matthew Mountford for pointing out that this post makes some gross simplifications. The calculations above must be taken as averages among many investors over time who don’t all own the same share of each company. The most recent investors in a start-up are not going to make much of a return on their investment at all if the company is acquired at its current valuation, or if that valuation is confirmed by the market in an initial public offering. However, earlier investors would stand to make much more, since their share in the company is presumably larger relative to a smaller initial investment. As for the founders, their investment might have been only their time, their expertise, and many, many boxes of pizza. Yet they will have transmuted that very small commitment into extraordinary wealth — if the valuation is indeed correct.

Here’s another way of thinking about this chart: Recently, venture capitalists have been willing to pay millions of dollars for a very small share of these new companies. Those transactions imply the very large valuations you see in the table above. Whether those valuations are justified depends on the actual financial situation of each company, as Mountford notes. But it seems unlikely that all of these companies have such excellent financials.